Protecting Your Wallet

To say I was shocked is an understatement; I imagine you felt the same way when you saw that in early December, the Camden (NJ) City Council voted to lay off nearly half of its police force. That one vote demonstrated how fragile our economy is right now and how desperate some municipalities and states are becoming as they struggle to balance budgets.

As the year 2011 looms in the future, there is good news. Most economists think that the national economy has stabilized. They think that, while the recession is not over, the situation should not deteriorate any more. There is also bad news. Local and state governments used federal grants to balance their budgets for the past two years. Those grants are over and revenues have not recovered, which means that mayors and governors alike are scrambling to cut costs. Especially at the local level, personnel costs are the largest expense, and generally police departments account for the majority of that money.

That means you and I could be facing some challenging times.

Cost Control

Government leaders get elected by doing popular things; very rarely is reducing the police force a popular cause. But the reality is that if a government needs to cut costs, they can only reduce expenses by so much before they have to go after personnel costs. Think about it: the department still needs to buy pens and paper to function, and you still need electricity to run everything. In much-stressed locales, leaders are going to have no choice but to go after salary costs. That may mean shrinking wallets for you and me.

There are three ways to reduce salary costs. First, the mayor (or governor) can reduce salary and pay rates. Some unions have already agreed to that, while others are being asked to make concessions. Those of us not covered by a union may not have any say in the matter. Second, the chief can be required to reduce overtime through varied staffing and few officers on the street. For many officers, especially younger ones with families, overtime can be essential income to the monthly budget. Third is the drastic measure taken in Camden and, to a lesser extent, elsewhere: layoffs.

Protecting Yourself

Chances are most of us are going to have to look at making due with less in the coming year. Raises that were already negotiated may have to be voluntarily given up. New bargaining agreements will probably not include any raises worth noting; in fact, many of us will be asked to pay more for our health care and pension expenses. Overtime will be cut. In short, times will be lean.

And of course, there is the potential for layoffs.

To protect yourself and your family, you can take both short-term and long-term actions to insulate your finances. There is nothing fun about preparing for lean times; it means more work and less luxury. But if you have your financial house in order, you may be able to weather these rough times and enjoy better times in the (we hope) near future.

Short Term

There are a number of ideas for addressing this financial attack in the short-term. Among them are:

Find a side-job that is not related to your agency, such as off-duty security work, working at a store on your off-days, or teaching at a community college.

Reduce your expenses by cutting back on premium TV packages, unlimited Internet access on your cell phone, and turning down the thermostat in your home (experts say you save 3% with each degree you reduce it).

Eat out less. Bringing lunch to work and having family dinners at home rather than eating at a restaurant can save you a small fortune.

Long Term

Long term actions to financial stability will take more planning and more time, but they will give you greater flexibility in the future should we face another economic downturn like the one we have now. Key steps include:

Reducing your housing costs to 25% or less of your take home pay; that may mean downsizing your house.

Aggressively attack and reduce your debt. You may have to sell off some toys or fancy new cars, but if you don't have a monthly payment on something like that, you will have much greater flexibility.

Build up a big emergency fund. Most experts recommend three to six months of living expenses should be stored away for a rainy day.

Conclusion

No one likes to think about layoffs and lower pay, especially during the holidays, but 2011 is likely to be a tough year for many of us, so it is best to go into the year with a plan. Obviously, if you are faced with serious threats to your income in the near future, you have to take some immediate action. Many of the short term ideas will only help you for a short while; the long term changes are the ones that will help you weather anything drastic.

If you are 12 months from retirement, you may not have to worry too much about layoffs. However, as Camden has shown, most of us may not be immune if our employer faces a major fiscal crisis. There's no time like the present to start making a plan, just in case.